Strong Corporate Earnings and the
Bear Market: How it Will Play Out

Remember this summer when the Dow Jones Industrial Average had a couple of 400-point loss days and we heard so many stock advisors and analysts tell us we were headed straight into a second recession…that corporate earnings would plummet? Stocks fell 20% from their May 2, 2011, high and all of a sudden headlines started to appear saying that we were in a bear market.

Well, these advisors and analysts jumped the gun, as most fail to understand how a bear market actually works.

Let’s take a quick look at some earnings reports from big American companies over the past day or two:

  • American Express Co. (NYSE/AXP) made $1.24 billion in the third quarter, up 13% from the same period of last year.
  • AT&T Inc. (NYSE/T) reported a big profit of $3.62 billion in its last three months.
  • Intel Corporation (NYSE/INTC) posted a 17% profit gain to $3.47 billion in the third quarter.
  • Morgan Stanley (NYSE/MS) beat analyst expectations and made $2.2 billion in the last quarter.
  • Even beleaguered Bank of America (NYSE/BAC) surprised and reported a strong profit of $5.9 billion in the third quarter.

All told, these few companies mentioned above added $16.43 billion to their coffers in the third quarter. Most of corporate America is doing fine right now (see Three Big Money Profit Stocks). And if they start to see earning growth slow, they’ll simply cut payroll again.

Where am I going with all this?

For the benefit of our thousands of new readers, here’s where we stand today.

A 20-plus-year bull market in stocks ended in October of 2007. A bear market started in October of 2007 that served to send stocks to a 12-year low on March 9, 2009…what I refer to as Phase I of the bear market. On March 9, 2009, a bear market rally was born. That rally, which is a classical Phase II of a bear market, has been going on now for 31 months. Bear market rallies last three to four years.

Strong earnings growth is coming from corporate America. Pessimism amongst stock advisors and investors is also very high. Bear market rallies continue higher under such a scenario. A bear market rally has only one purpose: to give investors the false hope that all is well and that stocks are a safe bet. We’re not there with this mentality yet, but that’s where we are headed. And when we reach that point, that’s when the bear market will start to head south (Phase III) towards its March 9, 2009 low.

Sure, corporate earnings are strong. But the long-term structural problems of the U.S. (i.e. underemployment of 16.5%; interest rates that have bottomed and can only rise; a fiat currency in too much supply; inflation) will eventually overcome corporate America and the stock market.

Michael’s Personal Notes:

As I write this morning, the price of gold bullion is down about $25.00 to $1,619 an ounce. Twice since gold fell close to $1,600 an ounce it has bounced back strongly.

For die-hard gold fans, the number to watch, the support level for gold, is $1,500 an ounce. At that level, I believe gold would be a screaming buy. At $1,500 an ounce, gold would have corrected a full 20% from its record high of $1,895 reached on September 5, 2011. At $1,500 an ounce, gold bullion prices would be severely oversold. At $1,550 an ounce, a huge opportunity would present itself for gold investments.

There are plenty of reasons gold investments are still the place to be (see Answered: Can I Still Make Money Buying Gold Now?). And the best way to make money in the 10-year old bull market in gold is with the stocks of the junior and senior gold-mining stocks. I would look at any price weakness in the gold-mining stocks as opportunity. One or two years out, we will look back at the gold-mining stocks and realize what a bargain they were in the fall of 2011.

As I wrote yesterday, all the money printing by world central banks since the credit crisis hit in 2008 has greatly expanded the fiat money supply. And the more fiat money in circulation, the greater the threat of inflation, as evidenced by Britain’s inflation rate hitting a three-year high in September—5.2% annualized! We could be getting close to a real buying opportunity for the gold-mining stocks (see Gold Bullion’s Price Action: Time to Separate the Men from the Boys).

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average continues to hover at the same level it opened at in 2011. Corporate earnings reports for the third quarter of 2011 have been respectable thus far. Pessimism continues to preside amongst investors and stock market advisors. On the backdrop of continued earnings growth, I believe that stock prices will rise.

A bear market rally in stocks that started in March of 2009, although old and “long in the tooth,” as they say, presides.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in PROFIT CONFIDENTIAL, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.